China Wage Gains Hurt by Weaker Profit Damp Consumption

China’s wage gains have moderated on
weaker corporate profits, capping consumer demand as the
government seeks to sustain a rebound after a seven-quarter
economic slowdown.

Average urban salaries rose 12 percent in the first nine
months from a year earlier without adjusting for inflation,
slowing from 14.4 percent for all of 2011 and 13.3 percent in
2010, government data show. Restaurant operator Yum Brands! Inc. (YUM)
reports smaller pay increases, and labor ministry data show the
same for minimum wages.

Deeper declines in wage growth would undermine efforts by
China’s new leadership under Xi Jinping to boost consumer
spending and shift the world’s second-biggest economy away from
dependence on investment and exports. Overcapacity in
manufacturing is weighing on profits, with the latest reading
due tomorrow when the statistics bureau releases industrial
companies’ net income for this year through October.

“Given the poor profit picture, wage growth is bound to
slow down in the coming quarters and this is set to reduce the
robustness of consumption,” said Louis Kuijs, chief China
economist at Royal Bank of Scotland Plc in Hong Kong, who
formerly worked at the World Bank in Beijing. “The expected
slowdown will impact the rebalancing in the sense that it will
reduce the relative role of consumption in the short term.”

Li Keqiang, the second-highest ranked official in the new
Communist Party leadership and set to take over from Wen Jiabao
as premier in March, said last week that household spending is
key to boosting domestic demand.

‘Disruptive Bust’

Minimum wages rose an average 19.4 percent in 18 provinces
this year through September, government data show. That follows
nine-month gains of 21.7 percent in 21 provinces last year and
24 percent in 30 provinces in 2010. China has targeted an annual
average increase of 13 percent for 2011-15.

Consumption, which includes government and household
spending, fell to 49.1 percent of gross domestic product in 2011
from 59.6 percent in 2002, when Hu Jintao began his decade as
Communist Party chief. Last year’s figure was close to the
lowest contribution since China’s reform and opening up policy
started in 1978, government data show.

“Changing this model has become of paramount importance if
China is to avoid a disruptive bust in investment in the next
one to two years and lapse into a middle-income trap in the
medium term,” George Magnus, senior economic adviser at UBS AG,
wrote in a Nov. 22 report, referring to growth slowdowns in
developing nations after incomes rise.

Hu’s Target

In his last major speech as Communist Party chief this
month, Hu vowed to double per capita income by 2020 from 2010, a
target that HSBC Holdings Plc estimates would signal real growth
of about 7 percent a year.

China’s benchmark Shanghai Composite Index (SHCOMP) of stocks
dropped about 18 percent from this year’s high on March 2
through Nov. 23 on concern that slowing economic growth and
higher costs are crimping profits. The gauge was down 0.3
percent as of 1:46 p.m. Companies reported a combined 1.9
percent decline in third-quarter earnings, according to data on
899 corporate results compiled by Bloomberg since Sept. 30.

Industrial companies’ profits declined 1.8 percent in the
first three quarters after a 27 percent rise for the same period
in 2011, data from the statistics bureau showed

In a Nov. 19 report, JPMorgan Chase & Co. said it continues
to be “underweight” on China equities and a “key concern is
profits as capacity continues to grow faster than demand.”

Overcapacity could lead companies to cut capital spending,
which would hurt the employment market, analysts led by Hong
Kong-based Adrian Mowat and Sunil Garg wrote, adding that “wage
inflation would fall from the mid-teens, resulting in weaker
consumption.”

Consumer Confidence

Elsewhere in Asia, South Korean consumer confidence
rebounded from a nine-month low this month as the economy began
to show signs of improvement. Singapore’s industrial output fell
from a year earlier for a third month in October as
manufacturers produced fewer electronics and pharmaceuticals.

In the U.S., an index of Texas manufacturing by the Federal
Reserve Bank of Dallas probably rose for a second month in
November, a separate Bloomberg survey showed. The Chicago Fed is
due to release its October national activity index reading.

In Europe, finance ministers from the 17-member euro area
will hold a meeting today to discuss unlocking bailout funds for
Greece. Indexes of consumer confidence in Germany and Italy are
due today.

Growth Pace

China’s economy expanded 7.4 percent in the third quarter
from a year earlier, the slowest pace in three years. Analysts
forecast a rebound in the October-December period to 7.7 percent,
based on the median estimate in a Bloomberg survey conducted Nov.
14-19.

Growth in investment growth has outpaced consumption for
years, posing dangers including higher bad debts, overcapacity,
lower profitability, environmental degradation, social
instability and external imbalances, according to the World Bank
and International Monetary Fund. The global financial crisis
exposed the risks to China’s economy from its dependence on
exports as shipments fell for 13 months and about 20 million
migrant workers lost their jobs.

Yum! Brands, the U.S.-based operator of KFC and Pizza Hut
restaurants which has about 5,000 outlets in China, saw its
local labor-cost increases ease last quarter for the third
straight period, slowing to an 8 percent pace, Chief Financial
Officer Patrick Grismer said on an Oct. 10 conference call with
analysts.

“Food inflation is falling, so there is less need to help
minimum-wage workers,” said Alaistair Chan, a Sydney-based
economist for Moody’s Analytics. “Median wage growth will
naturally slow as it gets higher, because productivity gains
slow” and diminishing returns to capital and labor set in, Chan
said.

Consumer prices increased 1.7 percent in October from a
year earlier, down from a three-year high of 6.5 percent in July
2011. Food costs rose 1.8 percent last month, down from an 11.9
percent gain a year earlier, according to the statistics bureau.

--Zheng Lifei. With assistance from Zhou Xin and Nerys Avery in
Beijing, Sharon Chen and Stephanie Phang in Singapore and Paul Panckhurst and Darren Boey in Hong Kong. Editors: Scott Lanman,
James Mayger